The dynamics of crude oil

In recent times, WTI has been trading at a heavy discount to Brent, which is seen as a broken benchmark. For India, this means a spurt in the oil import bill and inflationary tendencies.

As India marches forward, it is inevitable that the country’s energy consumption will also increase. The total oil bill constitutes almost 40 per cent of the total imports. India primarily imports crude oil of the Oman-Dubai sour grade and the Brent sweet in the ratio of 58:42.

Prices in the oil market have been concentrated around three main regional crude oil benchmarks, or `marker’ crudes: West Texas Intermediate (WTI) from the US, Brent Blend from the UK North Sea and Dubai, or Fateh, from the UAE.
Crude oil is graded on the basis of its specific gravity (API) and the sulphur level. Higher API gravity degree oil values have a greater commercial value. The lower the level of sulphur, the sweeter and the more preferred the oil.

West Texas Intermediate (WTI) is the underlying commodity of the NYMEX oil futures contracts. It is of very high quality with an API gravity of 39.6 degrees (a `light’ crude oil), and containing only about 0.24 per cent of sulphur (a `sweet’ crude oil). It is ideal for refining products such as low-sulphur petrol and low-sulphur diesel.

Brent is a benchmark for oil from Europe, Africa and West Asia and is traded on the ICE exchange (London). Its API gravity is 38.3 degrees (a `light’ crude, but not as `light’ as WTI), while it contains about 0.37 per cent of sulphur (a `sweet’ crude, but again less `sweet’ than WTI). Brent blend is ideal for making gasoline and middle distillates.

As a result of the gravity and sulphur differences, WTI is preferred by refiners and is processed into high-value products such as petrol, diesel, heating oil, and jet fuel. It typically trades at a $1-2/barrel premium to Brent. However, in recent times, it has been seen that WTI trades at a heavy discount (as high as $7 per barrel) to Brent. Logically, WTI is a higher grade crude and should trade at a higher price. So, what is the reason for this divergence from the norm?

Hindu Business Online